Wednesday, October 31, 2012

"The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown... Because we remember pain and the menace of death more vividly than pleasure, and because our feelings toward the beneficent aspects of the unknown have from the first been captured and formalised by conventional religious rituals, it has fallen to the lot of the darker and more maleficent side of cosmic mystery to figure chiefly in our popular supernatural folklore. This tendency, too, is naturally enhanced by the fact that uncertainty and danger are always closely allied; thus making any kind of an unknown world a world of peril and evil possibilities. When to this sense of fear and evil the inevitable fascination of wonder and curiosity is superadded, there is born a composite body of keen emotion and imaginative provocation whose vitality must of necessity endure as long as the human race itself. Children will always be afraid of the dark, and men with minds sensitive to hereditary impulse will always tremble at the thought of the hidden and fathomless worlds of strange life which may pulsate in the gulfs beyond the stars, or press hideously upon our own globe in unholy dimensions which only the dead and the moonstruck can glimpse."

There would be a couple changes to a traditional block grant I'd make: I'd make the ramped up funding federal still of course. The whole point of it being federal in the first place is subsidization of disaster areas, after all. So let FEMA operate on a state level and then make resources available when it makes sense. I'd also make sure whatever tracking or monitoring work FEMA does (I don't know how much it does - maybe this is all NOAA) stays federal. That seems pointless to do at the state level.

Otherwise, states and localities prepare for disaster anyway and they know their states best. Let them run their own little FEMAs. Give them cash infusions when disasters are declared. Have an MOU set up between different state FEMAs so that Texans in the agency are expected to go help (and report to) New Jerseyans. But let the New Jerseyans do disaster relief in New Jersey.

"If you take enough econ classes, you will eventually learn to describe hypothetical conditions under which destruction could be a net blessing. But, in the real world, it’s pretty crazy for you to think you know that those conditions actually obtain. But if you do think those conditions in fact obtain now, then please explain to me why it would not also be good to have the military bomb a city or two."

Nonsense. I'm not sure there is any good economics argument that would lead someone to expect "a net blessing". Such a claim shouldn't be given this kind of dignity - as far as I know it can't be backed up by any hypothetical conditions worth mentioning. Anyone saying that definitely should be expected to explain why it would not also be good to have the military bomb a city or two.

Commenter SM mentions the Mercatus work. In case people don't know where that is, you can find it here.

The Urban Institute also had a major post-Katrina research effort. You can find that work collected here. I contributed to one of those reports, although it's a less interesting one - it was a feasibility study for Katrina research... so more behind the scenes research planning than anything else.

On Facebook, Steve posts a great video reaching back to our experience with Katrina elaborating on the role that the private sector plays in disaster relief.

The advantages of the private sector over the public in disaster are the same that they are in normal times: the ability to make use of decentralized knowledge. Most of the critique of FEMA is quite good. Steve does make some naive assumptions about the incentives of FEMA officials - assumptions that he does not make about Wal-Mart and which economists usually criticize when they are made about private actors. But overall the point about the advantages of Wal-Mart over FEMA are very well made. He also goes over how why the Coast Guard performs well when FEMA doesn't, which helps to get past this idea that it's just a public vs. private sector thing.

The conclusion is very similar to Obama's statements prior to Sandy: listen to the people in your communities. They are the best positioned to handle these problems.

I had been meaning to watch this series, and caught my first episode (the first one on Andrew Carnegie) last night. I highly recommend this to anyone with an interest in American economic history. It's very well made, and they have commentary from both historians and entrepreneurs (all of them you'll probably recognize).

They said at several points that Carnegie "saw the future", which reminded me a lot of what Keynes said about entrepreneurs. I also liked that it was honest and fair. They praised what deserved to be praised, and they criticized what deserved to be criticized. The entire series is an homage to these men, so it's obviously mostly positive (as it should be!) but they're pretty straightforward about the pettiness that lead to things like the Johnstown flood. The episode ended with the flood itself... I'm not sure if in the next episode they'll share that Frick actually donated to relief efforts.

I highly recommend it and I'm looking forward to getting to the other episodes.

Shared here with permission. This took about two minutes of my morning.

"Hi Professor Morici -
I'm an economics doctoral student at American University, and I've recently been involved in some discussions around the economic effects of disasters. I was wondering if you could clarify a point you were making at Philly.com. My understanding of the economics of natural disasters is that as long as they don't severely damage the capital stock or introduce some other strong negative shock, they tend to have a positive effect on GDP, especially at a time when factors of production are underutilized. As you point out in your article, you also don't usually rebuild the same structures that you had before; you produce better structures. But that doesn't imply, of course, that society is wealthier as a result of a disaster. Wealth is destroyed by the hurricane, and some of the resources used to rebuild come out of society's wealth, so there is no reason to think society is wealthier even thought the capital stock may be much improved qualitatively and GDP gets a boost.
Is that a good summary of your opinion on the issue?
ThanksDaniel Kuehn"

*****

[Emphasis is mine]

"Wealth is a stock, income (GDP) is a flow.Merely rebuilding as before would leave the society less wealthy--wealth would be reduced by the size of the damage. Rebuilding better would mitigate some of that effect, but not necessarily all--likely not.
Economic activity (GDP) is initially depressed by the storm but then boosted, and will likely be higher several quarters from now.
Peter Morici
Professor
Department of Logistics, Business and Public Policy
Robert H. Smith School of Business
3413 Van Munching Hall
University of Maryland
College Park, MD 20742-1815"

*****

I was thinking a little about "likely not" vs. "never". I suppose you could imagine some extremely advanced innovations that had never actually been build because existing infrastructure was decent enough. With the opportunity to apply those innovations, scale economies would kick in and we'd be living in some fantastic world that would have taken decades to emerge otherwise. It's the basic idea of leap-frogging. It's possible, I guess, but as Morici says "likely not".

Anyway, this seems to squarely confirm my read and not Don and Bob's read of Morici.

He writes: "By the end of 2012 there were 312 million Americans out of 7 billion people on the planet. By 2062--if we stay on the current policy track--there will be 500 million Americans out of 10 billion people on the planet, as compared to 340 million if we were to end net immigration now and if birthrates remained the same. In this sense, America in 2062 will--if we stay on our current policy track--be a nation that is 1/3 post-2012 immigrants.
The thoughtful Adam Ozimek thinks that isn't enough.
He thinks the United States needs more high-skill immigrants. I think the United States needs more immigrants--more people willing to take risks and work hard to seek a better life for themselves and their children, and illiterates from Chiapas seem to me as good as doctors from Calcutta"

This is a point I've been making a lot for the last several months. There's very little evidence of persistent high-skill labor shortages. That's what we have wages for. There's no reason to privelege this class of labor. None of the people who talk like this would make statements like this about priveleging certain types of imports over other types. So why do they do that with labor?

Never mind the fact that immigration is about more than just the labor market: people have aspirations to be Americans besides just high skill workers. My family wouldn't have made the cut if we had focused on high skill workers in previous centuries.

*****

A note in light of some recent unpleasantness: this is one question where Don Boudreaux has always been very clear and very right. Even when some of his colleagues came out in support of "staple act" legislation to make it easier for high skill workers to immigrate than low skill workers, Don said quite clearly that there's no reason for extending such special priveleges. You can use the search function on the blog to find specific instances - I know I drew attention to his posts on that in at least one or two cases.

Tuesday, October 30, 2012

He continues to misunderstand the argument when he writes things like this: " If Morici – as I gather interpreted by Daniel – is correct, folks in places such as St. Louis and Phoenix should be disappointed, at least as far as their material standard of living goes, that they were denied Sandy’s munificence."

The idea is offensive, and he owes Morici an apology for even suggesting it - to say nothing of promoting that on a well read blog.

There was a brief comical interlude when the economics professor called it "fancying up the discussion" simply to distinguish between stocks and flows.

And then (as forecast) he brought in Krugman and accused him of celebrating the "benefits of terrorist attacks".

Fuck that.

You know why I continue to point out the problems with Cafe Hayek? Because they're bullies. And I've gotten lots of emails thanking me for it, including from a former student of Don's who agrees he's a bully. The man has a book whose title accuses people who disagree with him of being "half-wits" and "hypocrites". As long as people seem relatively interested in the critique I'll keep pointing it out.

A lot of their ammo gets pointed at Keynesianism, and I also have an interest in responding to that (the heyday of that was a couple years ago) because of personal interests. But certainly if you accuse good people of "celebrating" this stuff, I'm going to say something. It's not well reasoned, and it's simply not nice.

Not content to refine distinctions between stocks and flows where they get a little fuzzy in the hands of journalists, Don goes WAY beyond anything Peter Morici ever actually says about the economics of disasters. That's called lying at worst, or being misleading at best (I won't outright call it lying because Don is slippery as to whether he's saying Morici has ever said any of this... but it's definitely misleading).

One other thing that bugs me about this bad tendency among certain economists: why does he call it "vulgar Keynesianism"? Why does Keynes always get whipped out when we talk about disaster economics? It's not completely irrelevant (since things at or below full employment have different implications), but it doesn't really have anything to do with Keynesianism.

Do we even know if Morici considers himself a Keynesian? Does anyone have any evidence he's a Keynesian? I heard this somewhere else recently too - citing Morici on disasters and saying "see that's what Keynesians think". Is he even Keynesian?

One of the critical requirements for disasters to show up as a positive impact on flow variables (like GDP) is that the damage they do to stock variables isn't so great that it impairs normal economic processes. That's obviously not a foregone conclusion, and there's a lot to worry about with subway damage in NYC.

Here's another possibility (this doesn't change anything Arnold says about the subway). Maybe this will be a big boost to telecommuting and virtual workplaces. Obviously this is only relevant for a part of the workforce, but I suspect a lot more work could be done virtually than is in actuality. I could have done almost all my Urban Institute work from home. Face-to-face meetings are nice but I did some conference calls and that worked fine. Kate teleworks on and off and as long as she's not doing training she could do her entire job from home. To some extent a lot of face time in the office is purely out of tradition.

Then again, I wouldn't mind seeing a big federally funded infrastructure investment in the eastern U.S. either.

- As I expected, the commentary about the hurricane's impact on GDP is of mixed quality but there's good stuff out there. The best I've seen so far is Jared Bernstein's post which parses out a lot of the potential impacts. I haven't seen a lot of bad blogging so far, but facebook is plastered with it.

- This is an OK New York Times article on the role of government in disasters. The title really rubs me the wrong way. You don't need "big" government at all for disaster preparedness. This is a perfect application of Obama's old line that it's not an issue of big vs. small government. Nobody wants big government. That's a false choice. It's an issue of smart vs. dumb government. If you are the sort of person that thinks it's OK if after a disaster resources only get to people with the willingness and ability to pay for them, then there's no need for government. If you think they should get to the people who need it regardless of ability to pay, then you really need markets and government.

- And speaking of markets, Steve Horwitz shared this great old NPR post about big box reactions to Irene last year. The grocery store and hardware store I went to were both very well prepared.

- This is another good article on the economic impact of Sandy. One important distinction it draws between this storm and Katrina is the shock that Katrina had to oil prices and the permanent relocation of a lot of residents.

"We are brought face to face with the intricate relationships of the innermost heart of our economic system when we remember that a political catastrophe like the Great War or a natural catastrophe like the Japanese earthquake of 1923, instead of retarding economic life, generally enlivens it, and thus tends to bring about not a crisis but a boom. Certainly catastrophes lead to an impoverishment of the economic system, but we must guard against confusing impoverishment with a crisis, all the more so as this confusion is an extremely common one. If we agree to understand by an economic crisis a temporary paralysis of the economic process which leads to a disturbance of the exchange apparatus with its consequences of over-production, surplus stocks, and insolvencies, we realize that it is characterized not by a scarcity but by a superfluity of goods, while the hall-mark of impoverishment is a deficiency of goods. This deficiency of goods generally spurs on the economic machine to make the highest number of revolutions it is capable, as was very markedly the case during the war. An economic crisis is therefore not an expression of shortage but of abundance or - to put it better - of what seems to us 'abundance' because of the temporary paralysis of the process of exchange and of the economic process in general. That it leads in the long run to an impoverishment of the economic system is self-evident, but this does not affect the question of the origin of crises, which is the question we are discussing here."

In fairness I've thought it was defended in a confusing way in the past.

Bob scrutinizes Krugman's posts more than anyone I know, so I was a little surprised to see him miss the whole point in this post. Here he suggests that Christina Romer is parting from Krugman on the confidence fairy.

Mocking the confidence fairy - as I have always read it - is mocking the idea that #1 is going to turn the economy around when the major problem is a lack of demand, not a lack of loanable funds. Call me crazy, but that's just what Krugman has referenced every single time. And there were times - like during the Bush or the Clinton years - when Krugman noted the benefits of balancing budgets. Context matters, people.

But don't take my word for it. Read this Krugman post where he spells it out to others that apparently don't get the point:

"Expectations and the Confidence FairySome readers have asked whether there isn’t an inconsistency between my view that the Fed can promote economic recovery by changing expectations about future policy, and my ridicule of austerity proponents who invoke “confidence” as a reason to believe that austerity will actually be expansionary. But there isn’t really any inconsistency; it’s an orders of magnitude thing.
What the expansionary austerity types are claiming is that the indirect effect of austerity on confidence will outweigh the large direct depressing effect of cutting government spending now. That’s a very tall order. Consider a very simple New Keynesian model, like the one I used in my old Japan paper (pdf). This model assumes infinitely lived consumers with free access to capital markets, assumptions that would seem to be very favorable to the notion that changes in expected future policy matter. Yet even there, a perceived permanent fall in government spending will at best have zero effect on output; if there’s any notion that the cuts are temporary, they’ll be contractionary. Add more realism, and the odds of expansionary austerity get even worse.
By contrast, expectations-based monetary policy has no direct effect on the economy today, so any positives from expectations make it favorable over all. You don’t have to believe that the effects are really big to believe that they might be there.
Now, there is room for skepticism over the effectiveness of “credibly promising to be irresponsible” — which is why from the beginning of this crisis I’ve always favored using fiscal policy as the main answer, with unconventional monetary policy as a supplement. But the Fed should be doing what it can — and finally, it seems to be moving in that direction."

Now can anyone tell me with a straight face that Krugman and Romer aren't essentially on the same page? Just like Romer wrote: "Recent research suggests that New Deal programs may actually have had their primary impact on the economy by influencing consumer and business expectations of future growth and inflation."

Woke up intermittently last night and as best as I could tell the winds died down around 3 am. We have one big branch down, but it's safely in the yard. Still have power. We got a bad summer storm where a lot of the area lost power and I'm guessing that took out some of the weaker spots which put us in a better position this time. Still a lot of power out in the area, apparently.

For any small children in Falls Church who like to read about economics and follow this blog, I will be open for trick-or-treating tomorrow night. You will just have to randomly knock on doors and ask for me, though, because I'm not putting my address online.

You get double the candy if you dress up as John Maynard Keynes.

More seriously, New York looks pretty bad. First and foremost, I hope everyone's safe and sound. But as a secondary matter - keep an eye out for bad logic on the economics of disasters. There are good cases and there are bad cases to be made - and there are also a lot of bad responses to the good cases to be made. Gene Callahan agrees you should be vigilant for this! The way this gets tied into arguments for stimulus, there is a serious side to this, of course.

Monday, October 29, 2012

All is well so far, although the wind is loud and Bartleby thinks its the end of the world. Water just sits in this depression to the right of the house, right near a big maple (hopefully the tree itself isn't a problem... that would be very bad... but branches concern me). High winds are going to continue to be a risk in this area through the morning.

"Asking what a hurricane does to GDP is about as pointless as asking what a war does. Tells you more about problems with GDP than anything."

"Almost" because I think that second sentence should say "tells you more about problems with how people think about GDP than anything". GDP is just fine as a measure. It just doesn't measure what people sometimes act like it measures.

I just think it's an interesting question - what a hurricane will do to GDP - not a terribly important one. The question ignores virtually everything we don't like about hurricanes, after all!

It may very well boost it. Thanks to Bob Murphy for reminding me about a link I had already shared on facebook (although not here).

People will twist this into something completely different, but the analysis is quite sound.

GDP is important but it's not everything. Acknowledging the straightforward point that it could very wel boost GDP is by no means the same as saying that hurricanes are good things. They aren't. Don't let people twist the claim into something about general economic well-being.

Really making its mark. I'm worried about my grandarents - their house is elevated, so nothing too awful should happen, but the first two pictures are just up the road from them - I take walks on this beach up to the cape when I visit. Not many trees around there at least - that's good. But it's right near the center of the storm. Kate's grandma has a house across the bay in New Jersey which is right in its path, but she is thankfully in Boston with other family.

An otherwise reasonable guy on facebook has a status message up suggesting that Krugman would think Hurricane Sandy is a good thing. That's right - what you think of when you post on the hurricane is your own warped version of Krugman.

Oh, and the first commenter said he'd think a war with Iran was a good thing.

"You report that Mexico is now successful at producing lots of engineering graduates, but so far unsuccessful at employing this talent in ways that unleash substantial economic growth (“Mexico is now a top producer of engineers, but where are jobs?” Oct. 29). Herein lies an important economic lesson: those who wish to promote genuine economic growth must more carefully distinguish cause from effect.
That the United States surpasses Mexico at employing engineering (and other) talents creatively and productively is an effect of America’s greater openness to competition and creative destruction, as well as of the fact that a significant number of Americans continue to admire and applaud the bourgeois virtues that fuel innovative commerce and industry. So in the U.S. the productive employment of engineers is less a root cause of America’s economic success than an effect of America’s underlying bourgeois-friendly institutions.
A successful modern economy does indeed productively use a large number of engineers, but the mere availability of a large number of engineers does not itself produce a successful modern economy."

The last paragraph is right on and similar to a lot of things I say about the issue (Don Boudreaux also tends to agree with me on the problems with priveleging high skill immigrants over low skill immigrants). But I think the first two paragraphs are misleading. "Bourgeois virtues" and a market oriented society are critical for long-run growth prospects but have nothing to do with the differential employment rates for engineers in the U.S. and Mexico. That is ultimately a demand question. There is no reason to expect artificial boosts to supply to lead to higher utilization of engineers (at least not without depressing wages in the market first). Even to the extent that you can increase employment after depressing wages, skilled workers like engineers are going to move to other fields where they'll probably do fine but where their skills won't be fully utilized.

But this demand issue really has little to do with a market oriented society. Full fledged socialist societies can usually find lots of things for scientists and engineers to do, after all. That completely misses the point. That's not a "good" outcome. And ultimately it's not socialism that employs those engineers any more than it is bourgeois virtues here. What employs engineers is demand for engineers, regardless of what kind of virtues the society has.

Those virtues help or hurt growth. They are not a guide to the dynamics of professional labor markets.

First, there could be very long lags. Again think of what all the applications of relativity are. Needless to say they did not crop up in GDP statistics immediately after 1905.

Second, they are much more likely to impact welfare than GDP. Think of what we like about science and what it does for society. We like that it gives us cooler stuff than we could imagine before with comparable resources applied. It makes our lives better. It does not necessarily make the total amount of money spent on final products higher. Indeed, it may make that lower (think about electronics prices).

The issue has been raised by Alex Tabarrok and Bryan Caplan. I'm fine with schools experimenting with this sort of thing, but for much different reasons than Bryan and Alex are talking about. If they want to grow certain fields at their university, or if they want students to pay more for things that are relatively more costly to teach I'm fine with that. I'm also fine with the standard cross-subsidization that universities do.

But I don't like the idea of setting tuitions to deal with positive externalities associated with certain degrees, for much the same reason that I don't like "staple act" proposals (where green cards are automatically given to foreign STEM majors), or any other idea focused around generating more scientists and engineers just because they're good for society.

The positive externalities associated with science and engineering are not really analogous to the negative externalities of pollution that frame a lot of the way we think about externalities. There's a lot more diffusion and diversity in scientific outputs. Work on relativity a century ago was truly an externality because a lot of the economic benefits from it several decades later had no hope of being captured by the people working on it. But you didn't have to work on relativity. You could work on other physical problems that didn't stray far from classical mechanics (flight, rocketry) or from electricity or radio.

Or think about biology majors. You could work on a cure for malaria. That would do tremendous good for the world, far exceeding ability to pay. Or AIDs. But that's not the sort of stuff a lot of biology majors work on. There's other biology work to do.

This is very different from pollution. If we tax gasoline there's pretty much a one-for-one relation between gasoline produced and pollution produced (given a certain combustion technology being used). If we produce a biology major with skills relevant to pharmaceuticals there's a pretty good chance they're just going to add one more worker to the labs that produce anti-depression, anti-erectile dysfunction, and anti-baldness pills.

They'll be doing the non-spillover work by and large precisely because that's the most remunerative work (which is not surprising because that's the whole problem posed by positive spillovers in the first place).

This bugs me a lot about Romer's New Growth Theory models as well. He just sort of assumes that if you generate more researchers you're going to get more externalities. There's no consideration at all of the labor market for these researchers. When they graduate, what are they going to be paid to do? Why would they necesarily be paid for something that by definition doesn't have as big of a payoff? I'm hoping that one of my dissertation chapters will tackle exactly this question with regard to New Growth Theory.

So what's my solution?

I've said this a couple times before but I think it's pretty straightforward: if you're dealing with a demand-side externality, use a demand-side solution. With respect to the STEM labor market this is a demand-side externality, not a supply-side externality. So the solution is to pay scientists and engineers to do the work that they would not do otherwise. Internalize the externalities. If people are not demanding enough public infrastructure or AIDs research or particle accelerators, buy those things. That is where the externality is, not in the supply of these workers. Decades of research has shown that STEM workers are very responsive to wages (just like all workers). So if there is a demand deficit because of externalities, provide that demand and then let labor markets work.

That's not to say nothing goes wrong on the supply-side. There are all sorts of credit constraints and asymmetric information problems associated with educational investments. Those may deserve attention. But I can't really think of any major supply-side externalities specific to STEM. The STEM-specific problems, as far as I can tell, are all on the demand-side. So use a demand-side solution.

Although I think we'll be better off now than in the summer when we lived in a sauna for a few days... we have lots to bundle up in. We are better prepared with stuff than we were then. Plus the summer storms knocked out all the dead branches that were worrying me. There's a relatively healthy tree towering over our bedroom but let's hope it doesn't get that bad. The nice thing about this place is that with the fairly spacious crawl space I have no worries at all about flooding. That is quickly becoming my favorite feature of the house - it has made dealing with some plumbing issues really easy too (well, relatively easy).

Still, this does not look like it's going to be a wimpy storm. Hoping for the best.

1. Western Maryland is beautiful in the fall. Not a new realization, but a happy reminder.

2. The disparity between how good Kate is at serving in ping-pong and how horrendous she is at returning the ball is very confusing to me. I'm not great at either, but at least there's some parity in my ping pong skill set.

3. Herman Melville has a great economic intuition IMO.

4. When your reporting of the storm is centered around what it will do to the election, you sound like a jerk.

Saturday, October 27, 2012

1. I saw two positive ads in a row on TV last night - one from Romney and one from Obama. It made me very happy. I shouldn't be that happy watching political ads, so it's indicative of how bad they can be I think.

2. So something I was thinking about was that despite competing claims about "personality cults" and "worshipping" a particular candidate, I haven't noticed much of that. I think we may be misdiagnosing the problem. What I've seen instead is all sides (I'm including libertarians on this one) believe at their core that anyone who would vote for the other candidates is either ignorant or barbaric and that there is no real difference between the other two. I see this sort of talk a lot more than I see praise for ones own candidate. We in America have a healthy suspicion of politicians, and I think worrying too much about a personality cult is a misdiagnosis of the problem. Nobody seems to like their candidate and they understand that politics is a messy business and you don't get what you want. They don't seem to be expecting miracles from their candidate. But they do think he's decent enough particularly compared to the other monsters running.

Which brings me to my ultimate point: maybe the problem with politics isn't that it makes us servile and cultish. Maybe the problem with politics is that it makes us exaggerate what we don't like about other people and distrustful. I think it's much easier for people like me to swallow this after Bush, of course. An unjust war and a depression (even if he didn't cause it) are pretty bad. This is not like Republicans post-Clinton. They may not have liked him or his policies but how horrendous was he really (same with Reagan and Bush I for Democrats)? Obama is still in this depression so he may be getting some of the same effect, although I think it's inappropriate to lay that at either Obama or Bush's feet. So you can understand why people are on edge. But still - I think when we talk about personality cults we misdiagnose the problem. It's not that we love our guy, it's that we really despise the other guys and can't comprehend why anyone would vote for them.

Friday, October 26, 2012

"Not to mention the inherent problems with GDP. GDP doesn't mention home production, for instance. Since it's been largely the female side that has provided care in the household, switching them to the workplace would only superficially appear to be improving welfare. This isn't an argument that women should stay at home and work, since the same could easily go for men. (Which is largely happening. The spouse who makes the least amount of money has a tendency to watch after kids, take care of the house, etc., if one of them needs to, and men have had to take on this role more and more as the gender gap disappears.)
So, what would happen if we just shifted it around and put more women in the workplace? Less home production and any sort of production outside of GDP that women would be contributing to. Like Ryan says above, it could decrease welfare. That's assuming, of course, we have an optimal position and people are deciding that it would be utility maximizing for some to stay home and others to work. There very well could be inefficiencies there. This argument could go towards men as well. Since men have been absolving themselves from the workplace more and more since the 50's, I'm sure it would be easy to argue: "Why not convince men to stop leaving the workforce, so we can have male participation rates like the first half of the 20th century?" Men are leaving for a reason. For instance, men may not need to work and provide as much, since the workload can now be split between both spouses more easily. So perhaps they're trying to maximize utility between the two?
Long story short, I'm tired of people trying to use GDP as the end all be all measurement of happiness. We could probably do a lot of ridiculous things to raise GDP and a lot of them wouldn't make us any happier. Obviously, the article didn't mention any of this, so it's nothing against the article, but I imagine this is what many people would have inferred from it."

I agree with this very strongly on numerous levels. I've talked a lot on here before about the problems with over-interpreting GDP, and that GDP is not treated by a welfare measure by economists (it's usually journalists that bring that in), and nobody should take it that way. As far as I can tell we only care about GDP for one reason: output is income, and since production and employment are of necessity so closely tied together and since most Americans get their income from employment, we care a lot about whether GDP is off trend. But it's not welfare.

But let's put that point aside - the really important stuff here is about home production. Now I agree with the near universal decision by the national accounts people to exclude home production. That decision has been criticized at many points - most recently (to my knowledge) in the mid-90s. But the decision has been consistent and its the right decision because home production is not traded in the market so it doesn't really make sense to include it in accounts recording market exchanges.

That doesn't mean home production isn't a critical economic concept to consider. The national accounts people agree, in fact - the BEA has done some work with a historical home production account. The classic paper on time use and home production is Gronau (1977), with Becker and Mincer making early contributions as well. Nancy Folbre makes an important contribution in her theory of the misallocation of time, which brings in issues of positive externalities in home production. (Folbre blogs at Economix). Gronau's insights made their way into the labor supply literature, and a lot of what was learned was summarized in Juster and Stafford's JEL article on the subject.

I am just jumping into this literature because I'm writing a paper on home production over the business cycle which highlights exactly the trade-offs that the commenter discussions. It's for class, although I'd hope to clean it up and submit somewhere afterwards. One of the empirical findings has been that home production does not increase during recessions (including the current one) in the way that theory predicts it should. Why? One explanation I'm exploring is that when non-labor income also falls, the amount of time dedicated to home production becomes ambiguous. If we take a permanent income hypothesis approach, the financial crisis and housing bust represented a large negative shock to non-labor income which could help to explain why home production doesn't substantially increase. I'm using the American Time Use Survey for this work.

There's a fair amount of micro/labor work on home production (although there could be more). It has made less of an impact on macroeconomics. The exception is actually a small literature by Real Business Cycle theorists that include home production decisions in their model. I haven't looked closely at these, but apparently they help a lot to improve the model fit. My gender micro class is this semester. Next semester I'll hopefully be doing gender macro and I'd like to look into these RBC models a little more (I'm not sure they're on the syllabus but I should be doing another paper for it).

I'm curious if any of you think this demonstrates misogyny on the part of the Obama campaign. If you genuinely think that, I'm very curious to understand your logic.

Some background - this girl apparently has a show on HBO and this is in the spirit of that show. I agree - if David Axelrod wrote this up and found some random person to play in the video, that would be a lot weirder. But that is simply to say that comedy is often contextual.

It's interesting. But that's not necessarily the first solution. I mean its nice to dream about in the very long term, but right now we're talking about a trip of several thousand years to get to the closest star (to say nothing of a star we'd want to get to for some other reason).

You could imagine some sort of cryogenic human payload that we could send out much slower, much smaller, and much sooner. Granted, it would take some advances in cryogenics. But I imagine that would come sooner than bending space-time (which is really what inter-stellar travel would take). Develop cryogenics, freeze some intrepid colonists, set the timer, wake them up a year or two out from their destination so they can build up strength, etc. Or better yet, unfreeze the pilot and a couple others a year or two in advance and have them - with mechanized help - set up greenhouses and shelters before waking everyone else up on the destination planet. You would need a big ship, but you wouldn't need a massive one of the sort that people usually think about for inter-stellar travel.

By the time we get cryogenics in good shape we'll probably have a much better sense of what exoplanets are "livable". Then send off a bunch of these ships and seed the galaxy with human (and presumably other terrestrial) life. If we learn how to bend space time, fine - we'll beat the popsicles to these planets. If we don't learn how to bend space-time then its good to have sent them out. And if we all kill each other here on Earth it's very good that we sent them out.

The real concern is whether they can make it: whether the cryogenics is good enough. When we're talking about settling worlds outside our solar system, it's a one way ticket. So who really cares if it happens thousands and thousands of years after you and I are dead? Who cares if these popsicles are floating through space for millenia. When they touch down what's going on on Earth is completely irrelevant.

This would be extremely expensive, of course. And you need to wait for some science to be developed. But once it is we really need to consider insurance policies like this.

Does anyone know about statistics on TV show viewership? Do they break it down at a refined level geographically? I know this stuff is tracked for ratings, but I don't know what's available for people to analyze or how refined the data is.

Because this would be a really interesting labor supply shock to look into empirically.

"If female employment rates matched those of men, GDP would increase by 5% in America and 9% in Japan by 2020, according to a report by Booz & Company, a consultancy."

True. But presumably you could also say that increasing male employment - thus widening the the gender gap - would increase GDP as well. I don't think people would take that as a very good argument for deliberately widening the gender gap.

I'm not saying this to be dismissive of the goal. I do think the disparities are real (see my post earlier on Horwitz's video), and that there are things to be done about it. I just thought this was a funny way of putting the argument.

"The Government are very keen on amassing statistics - they collect them, add them, raise them to the n-th power, take the cube root and prepare wonderful diagrams. But what you must never forget is that every one of those figures comes in the first instance from the village watchman, who just puts down what he damn pleases."

Wednesday, October 24, 2012

So, the last post got me thinking about the interest deduction and I've been crunching some numbers to see if, with the mortgage and some major health expenses for Kate this spring, it might be worth itemizing this year. I don't have exact enough numbers on some of this stuff to know for sure (the medical one is kind of tricky), but it made me wonder... what percent of taxpayers actually itemize? It's something I never used to think about because my taxes were trivial to do, and then after college taxes got to be a little more of a chore but I wasn't close to having to worry about itemizing. That may change in the future (it may change this year depending on how this works out), but it really is a pretty big hurdle.

I only ask because I would have thought this percentage would be very easy to find, and I've been googling a little and it has been all that easy, which just made me more curious.

Usually I complain about either high skill work visa advocates that would never dream of "picking winners" so blatantly in any other policy arena but for some reason consider it good economics to do it with the labor market - or the "Staple Act" advocates who are like the high skill work visa advocates on steroid - or more recently the absolutely insane claim that liberalization of student visas is somehow low-hanging policy fruit.

Evan Soltas has now joined the ranks of people who utterly confuse me on this. He tweeted:

"Immigration fact of the day: The average likelihood of winning the Green Card Lottery is 0.26%. 50k visas, 14.7m entrants." [he must be rounding or adding by country likelihood because that doesn't quite come out right - DK]

Which I took to be a complaint about how tight the lottery was and a suggestion to expand it (that is certainly how others on twitter took it). That would be yet another weird way to expand immigration, because the lottery is for people from underrepresented countries. In other words, forget the people from Mexico, elsewhere in Central America, India, China, etc.... you know, the people that are traditionally very interested in becoming Americans. Instead toss green cards at populations where demand to migrate has traditionally been weaker.

It's nice, of course. More diversity in the melting pot is always good. But it's really a niche channel.

I'm still not sure if Soltas wants to expand this green card channel, but his readers seemed to.

But then I came across this post of his at Bloomberg, where Evan repeats the same "shortage" of scientists and engineers argument you always hear. Over half a century of thorough economic research has debunked the idea of persistent skilled labor shortages, and pretty standard economic theory suggests it shouldn't be a problem. So why do smart people want to tilt the scales in favor of these types of workers? I don't get it.

It's not shills or novices that have contributed to the literature on skilled labor shortages. I'm talking about George Stigler, David Blank, Kenneth Boulding, Kenneth Arrow, Walter Oi, Burt Barnow, Richard Freeman, and Sherwin Rosen.

Imagine if any other policy area worked the way immigration policy does. Take housing policy. Imagine if the government looked at McMansions out there and decided that clearly since these houses are worth more they are more valuable. (A couple years ago at least) their prices are going up fast - so they're clearly in high demand. What the government needs to do is subsidize these home buyers. They need to make it easier for them to buy a home relative to the boost they give to dinky small home owners or renters.

Oh wait - they have a policy like that already. It's called the mortgage interest deduction and economists think it's a bad idea because:

1. It's not good to pick home ownership as a winner over renting, and
2. If you're going to subsidize home ownership, there's no reason to do it in a regressive way

And yet this is exactly what all kinds of smart people advocate with immigration policy. I don't get it.

I'm kidding, of course. It was a good post from Bob. But I also recommend this one from CAP (HT Bob Murphy, as a matter of fact). I did wonder, when I shared Bob's post here, whether CAP really put so much emphasis on the "finite resources" thing (a point on which Bob is not only right, but also a lot clearer about than other Julian Simon boosters on the internet). CAP claims that misses the point of the report, which was primarily about oil and gas externalizing health and environmental costs, and on that point they're of course right.

I found this particularly interesting:

"The fossil fuel industry takes billions in direct tax incentives and subsidies every year. According to analysis by TR Rose Associates, for the past three decades, the coal industry has benefited from nearly $1 billion a year in subsidized public lands. And the oil-and-gas industry has benefited even more, taking $5.16 billion per year in subsidies in inflation-adjusted 2012 dollars. And these industries have been receiving public support for more than a century.
Let’s compare that to the renewable energy industry, a relatively new recipient of government support, which according to the TR Rose analysis receives $390 million per year in subsidies. Biofuels also receive about $1.1 billion per year. Phrased another way: The federal government’s commitment to supporting the oil and gas industry every year is about 3.5 times greater than its commitment to the renewable and biofuel energy industries."

The report they link to is hard to make sense of because they are averaging subsidies over a long period. That makes me think recent oil and gas subsidies might be less than the historic average (otherwise I imagine they would have shown it). But these sorts of things are path dependent, so that doesn't really matter. If you're concerned about government distortion of the energy market it seems like (even leaving aside the subsidy of externalties) the biggest problem is subsidization of oil and gas over a much longer period. Makes you wonder why groups like IER get so concerned about the renewable subsidies.

I said it in the last post, and I'll say it again. From my free market economist perspective I err on the side of being concerned about these implicit - and apparently also explicit - subsidies to the oil and gas industry. But that's just the free market perspective. Obviously there are other views besides the free market perspective that are less concerned about distortions, but that's my view.

I think he meant that no matter what the circumstances of conception that kid is just as valuable to God as any other kid.

If you think what he does about life and conception I don't see anything wrong with saying that.

What people heard was an endorsement of the violation implicit in a rape extending itself into pregnancy (and of course pregnancy is a violation of a woman if she did not want to become pregnant).

I don't understand how this guy couldn't have known that's what it would sound like. I also don't understand how anyone couldn't know what he actually meant to communicate. Of course the two aren't mutually exclusive, indeed the first almost implies the second (he might not like it, but he's identifying it as less bad). So I'm not saying he doesn't deserve whatever electoral response he gets for this. But what he thought he was communicating is pretty clear, I think.

I don't know why so many people get this wrong. Add drones to the list. I think it's just too chic to say that the fourth Indiana Jones, candy corn, and drones are bad. People are afraid to buck what is perceived to be the consensus. The fourth Indiana Jones is both a good movie and in the spirit of the first three; candy corn is delicious; drones are a humane and efficient advancement in war that will help to prevent flinging hundreds of thousands of young men with guns at each other in a strange corner of the planet. Next we need to move from robot planes to robot soldiers.

...is if you use the Romer-Bernstein forecast as a reasonable counter-factual.

There are some people with whom I feel safe assuming they don't know what they're talking about.

There are others I know know what they're talking about, which makes me worry.

The most positive spin that I can put on those cases is:

1. They know it's not a reasonable counterfactual
2. They know a reasonable counterfactual is hard to get
3. They're pretty sure a reasonable counterfactual would show a negative impact of the stimulus
4. So fibbing about the Romer-Bernstein forecast is a convenient way of getting your conclusion across in a way that's easy to understand, even though your analysis is complete horse shit
5. Getting your conclusion across in an environment where there is almost no chance of additional fiscal stimulus is for some reason more important than intellectual honesty

If #1 - #4 were driving you, you might be forgiven if #5 weren't the case. Let's say another stimulus was a serious possibility so it was worth being dishonest to prevent it because you sincerely believed it wasn't good for the country.

But #5 is true so these sorts of people are running out of pseudo-reasonable covers.

Tuesday, October 23, 2012

In this post, Mark Thoma casually points us to the recent Phillips Curve as it has recently revealed itself to us.

I may be going out on a limb here, but I think he is subtly suggesting we exploit that relationship to do some social good.

Certainly I would go out on that limb myself.

The standard answer is the expectation augmentation answer.

And that's fine, as far as it goes. But then that's an empirical question. How well anchored are inflation expectations now? Are they well anchored or poorly anchored? I would argue that they are fairly well anchored.

In my mind, the chance that I am wrong about that seems a lot lower than the chance that I am right. And if I am wrong I think we know what to do about high inflation. And also if I am wrong we should get a sense of it before its too late because we should be able to see whether inflation is accelerating or not. If there is really a terrifying new NAIRU it's going to show itself.

When I think about the competing risks here, I feel more and more like an old Keynesian on the Phillips Curve. Hell, it took those scoundrels almost two decades to cause any problems back in the third quarter of the twentieth century, and even then it was really exogenous oil shocks that did the heavy lifting, not the old Keynesians themselves.

But this strikes people as imprudent, and I don't understand why.

Did expectations augmentation become a greater risk after we understood it than it was before we understood it? That doesn't seem to make sense. The fact that old Keynesians who did not think in terms of expectations augmentation and managed a strong economy for two decades before any trouble happened suggests to me that we modern Keynesians, who do think in terms of expectation augmentation (and therefore know the warning signs) don't pose all that much of a stagflationary risk in the current depressionary environment.

The assessment of these risks seems so clear to me that it almost sounds silly to title this post "comepting risks".

This is a great post on the difference between the two (with respect to energy) by Bob Murphy.

I personally think a lot of Julian Simon boosters are terrible about how they make this point (I have one in mind in particular... see if you can guess who), and they beat well-meaning people over the head for thinking something very reasonable: that there is a physical finitude to certain resources.

I like Bob's take on it here because it takes care to point out that that's not really wrong at all, it's just not the most useful way of thinking about the issue.

I also think that saying "we should really be talking about about economic scarcity rather than physical scarcity" is better than beating people over the head for mentioning scarcity in a more colloquial sense because the economic argument isn't necessarily the cornucopia that some people present it as either. Innovation and the adoption of alternatives is driven by rising costs, which can be... well... costly. So reorienting people towards thinking about the right thing can get them to focus on those very real issues.

I haven't read the CAP report he's criticizing, so I'm not sure if I'd endorse his criticism in toto (I know you're all shocked I'm not taking Bob's read on them at face value). To the extent that the report is driven by the sentiment that these are scarce physical resources and therefore we need to diversify immediately, I'm obviously more on Bob's side. To the extent they are making an externality argument I think it's more tenable. To a free market economist like myself, there's an inherent artificial reduction in the cost of fossil fuels relative to their true cost. And as we know, that sort of market distortion can retard innovation and adaptation.

Monday, October 22, 2012

The Mercatus Center at GMU has released REGDATA, which allows you to compare the number of binding regulationsby industry from 1997 to 2010. I've scanne the working paper, the code book, and some of the files, and it looks like they've searched for standard regulatory language "shall"/"must", etc. in the CFR and alotted them by industry.

Quantifying regulations is obviously a worthwhile goal, but I would have thought one of the primary facts of regulatory economics is that different sorts of regulations have different results. I don't understand why adding up how many times an industry "shall" do something tells you anything.

"Bus companies shall put a yellow line near the front of the bus and a sign that tells everyone that federal law prohibits people from stepping across the yellow line" [for non-Americans, this is a weirdly emphatic, micromanaging, and highly visible regulation that's often puzzling to American bus riders]

is massively different from:

"All buses shall only use biofuels derived from hemp and recycled tie-dye t-shirts"

It's a little nanny-statish but you could see how the first one would have negligible or maybe even small positive value (there are some plausible negative externalities on you from a fellow bus-rider running up past that yellow line and yelling at the driver). The second regulation would have a large negative welfare impact.

These are goofy examples, but the point is regulations range from highly damaging to completely benign to highly beneficial.

I've seen this sort of thing done less formally in blog comment threads a lot, when people list the number of pages of federal regulations to prove what an awful country we live in. I've never understood why people think that means anything. I don't think formalizing it in a database improves the argument for this sort of data at all.

I think research on industrial regulation should probably take a page from labor economists working on labor market policy. Look at the policies and regulations one at a time. Don't think you can add up how many policies there are and that that tells you anything at all.

Sunday, October 21, 2012

A new Urban Institute paper is out by Stephen Wandner on the subject. Wandner was formerly a senior economist at DOL and has been a visiting fellow at the Urban Institute. I've spoken with him once or twice - always at the printer if I recall - and he's a nice and well informed guy.

From the summary:

"The Great Recession and the high unemployment that followed have been the public workforce system’s greatest challenge. How did the workforce system respond to these challenges? How has it performed over the past five years? How adequate has system funding been to serve the unemployed? This paper finds that that the American public policy response to the Great Recession was unbalanced and did not fully serve the immediate needs of unemployed workers by adequately funding reemployment and training services."

A commenter considers some of my views on the Electoral College problematic.

He further writes: "I think the great compromise was a poor choice, and so is the bizarre, cultic emphasis on the founders' intent that pervades American discourse, as though some 18th century landowners somehow ate from the tree of knowledge and then chopped it down to deny future generations its fruit — cherries, perhaps."

I can see how it comes across as odd. Perhaps in my defense I'd offer that there are many social visionaries since the founders that I (and many of us) respect a great deal as well. Jacksonian democracy; Emersonian self-reliance; Lincolnian unionism; Wilsonian self-deterimination (*braces himself for libertarian onslaught*); the entrepreneurialism of our Carnegie, Vanderbilt, Rockefeller, Ford and Morgans; the solidarity of our Debs, Gompers, and Haywoods; the democratic vistas of our Whitmans and our Deweys; the Rooseveltian new deals; the mountaintops of King and what he saw beyond them; the new federalism of Reagan, Clinton, and Rehnquist; the hope and change of Obama.

In American public life we do like ideas as well as the personalities that promoted those ideas. But I think it really is about the quality of the ideas. There's no personality we've embraced independent of ideas we've accepted. There's nobody we've adopted as The Leader simply because he or she lead us. They've all given us new ideas and new social hopes.

But the commenter is right, the 1770-1800 period seems to have a lot more ideas and personalities floating around with an enduring respect.

I think part of it is that we're not sure exactly what better alternative there is out there. I can think of places that have policy advantages over us. It's not a particularly long list (usually advantages have accompaniying disadvantages). But I can't think of very many that have constitutional advantages over us. I think that's part of the reason why we've done so well over the last two centuries and I also think it's part of the reason why so little has changed in any fundamental way.

It's not cultic, in other words.

There is a sense of awe around that generation. But there's awe because what they said and thought seems to have paid off. No one can seriously point to the record of the United States and fail to conclude that the founding fathers had at least as good a stab at how civilized, liberal society ought to go as just about any other contenders. The system has proven relatively self-correcting and flexible.

Either I have totally drunk the Kool-Aid or there's something legitimate here to respect.

And given how problematic and unstable radical change often proves, it seems entirely rational - the opposite of cultic - to say "I'll just see how the founders' institutions play out, thanks". I'm not sure what's supposed to be so enticing about the alternatives.

And these guys we'ren't just sitting back reflecting. They had an awful lot on the line. And it could have all broken down many times. It's not magic - it's a track record and a good sensible theory behind that track record.

"As it stands, presidential candidates are trying to appeal to the median voter in each state across a large number of states. That's how you get to be president. This reduces regional tensions because candidates are never trying to get 90% of the votes in a state."

He makes essentially the same point - in a federation you want consensus across the states, not just across the people. The one reform I'd support is giving electoral votes for each member of the House, not doing this House plus Senate thing that makes someone from Wyoming get a stronger vote for president than a Texan. But the winner take all nature of it - the insistence that Virginians get together and decide democratically who the commonwealth of Virginia will back - is very important.

Does any other country do it like this? I for one think the Electoral College was a stroke of brilliance on the part of the founders (not their only stroke of brilliance, of course).

Here is the table of contents with abstract. I started reading it last night, and it looks very interesting. It's a symposium on "motivated skepticism" or "political dogmatism", depending on how you view it. The idea is that empirical evidence shows that the best informed people on political issues are the most "dogmatic". The theory is that you develop theoretical frameworks for understanding political issues and as you receive new evidence you either reject it if it contradicts your theory (which is presumably supported - in your mind - by a long history of other evidence) or you investigate contridctory evidence much more skeptically than you would confirmatory evidence. So "dogmatists" end up being very well informed (or, to put it another way, well informed people tend to develop "dogmas").

The symposium explores whether this is the right way to think about it and whether it is a good thing or a bad thing.

As a description of the way people approach and use evidence, this all sounds very plausible to me.

My hesitation comes in with this word "dogma" ("ideology" is also used and I have the same hesitation about that). Maybe people aren't acting "dogmatically", they are acting "decisively" or "decidedly". Dogma usually implies a set of views you hold in the absence of empirical evidence which is not what Jeff Friedman and others are really talking about in this issue. They are using evidence here. Their use of it may be guided and directed by certain frameworks, but it seems very strange to me to call it dogmatic.

And that changes things considerably. Because if we all converge on an interpretive framework that's probably a pretty decent framework to work with, even if the way we got there is more sociological or pyschological than "rational".

The problem, of course, it what happens if you don't converge. You could have path dependence and multiple equilibria. I still think that's a great case for moving forward with pluralist institutions. If you have lots of frameworks that seem to do decently well for understanding the world, getting those frameworks together in a room to hash it out seems valuable to me. None of these are awful frameworks if they've helped people navigate a confusing sea of evidence.

He does some analogizing to social science which I think is a little dangerous. The whole point of a community of scientists is that you don't get to just dismiss evidence and peer review. It's a collective, consensus building endeavor in a way that the political beliefs you privately hold are not. It's weird to think of public and private scientific beliefs. They're essentially all public and we may hold private doubts about the veracity of certain consensus positions. That's a very different famework generating process compared to our political beliefs.

And when Friedman lists the social scientific frameworks that are in constant conflict with each other, something jumps out: they're all macroeconomic perspectives! Well as readers know macroeconomics is a lot like string theory right now. We have some basic things we may agree on, but there's not enough data to arbitrate between theories and so we have a lot of theories. Obviously we'd prefer it were different (or maybe not, it's kind of fun to fight about it), but this is not something that's characteristic of social science as a whole in the same way that string theory is not characteristic of physics as a whole.

I spend most of my time doing labor economics. Labor economists will argue a lot about how well you've identified your empirical model or about the relative magnitude of different elasticity estimates. But there's no real disagreement on the consensus body of theory and evidence itself. If labor economists disagree its in the political/policy realm more than the scientific realm.

Those are my reservations - it looks like an interesting issue, and I look forward to moving through it.

g > r has made a reappearance in the debt debates. Initially everybody ignored it becaue we were focusing on what was really fundamental about debt, but I think everybody pretty much accepts the Samuelsonian point as a practical matter. If your growth rate is greater than the interest rate, you're in the clear on the debt. If you complicate it a little more you can pull out a level of deficits that you can run each year and still maintain a stable debt level (relative to GDP). But g > r is good enough short hand for all these sustainable cases.

But I want to take a step back because g > r doesn't exactly smooth over all the problems with the debt debate we've been holding.

g > r means the economy can sustain a debt burden. It does not mean that that debt burden won't cost future generations (it doesn't add any more future value costs that taxation in the current period for the same expenditure wouldn't add, of course). To make the debt expenditure itself benefit everybody its not enough that g is greater than r. The rate of return on the expenditure has to be greater than r.

Think about it this way - let's say the economy was growing at g for reasons completely unrelated to the debt expenditure. If g > r then you can pay that debt, right? But if g isn't boosted by the debt expenditure then the public is still worse off than it would have been. Why not just forget the debt expenditure and just enjoy g without the debt service taken out of it?

So it's important to keep in mind that g > r is a sustainability condition, not a welfare improvement condition. To improve welfare, the expenditure has to be worth it, either because we care that much about the consumption or transfer that its supporting or because the expenditure is making an investmnet that will pay off down the road.

*****

I would point out one thing: it is a public service to explain g > r to people. If you tell the man on the street that we can run deficits every year until the end of time without increasing the burden of the debt, they typically don't respond well to that.

Friday, October 19, 2012

My first thought was not "wow! what a risk that guy was taking!"﻿. No. My first thought was "Well maybe he was an ardent Nazi, he just lost an arm in battle defending the Reich".

I actually met an old German soldier who did lose an arm on the Eastern front, when I was in Hamburg. He considered it a blessing - he said there was a big Soviet offensive the next day (he had been taken off the front line because of the injury), and that he was sure he would have died if he didn't get injured the day before.

He was a nice guy, and claimed he was never a party member. He certainly wasn't SS or anything like that. Who knows if that's really true but I didn't see any reason to assume otherwise.

1. The cost of debt raised to support a given transfer program is just the future value of the cost of taxes to support the same transfer program.

2. The cost of taxes to support a given transfer program are distributional and incentive costs. These can of course have second order effects.

If you accept both 1 and 2, is it fair to say that unless you're taking an individual perspective - like the way a family looks at its debt - the only cost of debt is distributional and incentive costs (and their associated second order effects)?

And further, is it safe to say that we all agree that since our society is composed of borrowers (all of us, when it comes to public debt) and lenders (bondholders) it's best not to think about public debt the way we think of a family's debts?

I don't care about Krugman.

This is right, right?

UPDATE: OK, let me clarify #2 a little. We call taxing the rich to give to the poor "redistribution" and we talk about the distributional effects of taxation. Why is it then not right to call taxing a guy in period 6 to pay a bondholder in period 6 a "distributional issue"? Why is it not right to observe that all debt does is move this "distributional issue" forward in time?

Gene has posts: here he reminds people that as of yet time travel is not possible and future generations did not vote on (much less plan for) the public debt they deal with. That, like taxes, is the price of modern civilization. It's something we're stuck with - we don't properly plan for it. And here he points out once again that a good indicator of whether Bob Murphy is miscommunicating Krugman's position is that he is making a claim about Krugman's position (I kid Bob... I like Bob).

But I am not done with Bob yet.

In this comment he seems to think I am marveling over the fact that whether or not g > r has practical implications for debt burdens.

Umm... no. Let's be clear: the implicit assumption of everybody so far has been to abstract away from those sort of sustainability issues. If you really think that's where we're at I have to seriously question how much progress we've made in this discussion.

What Grant helpfully points out is that Bob's models (as far as I can tell) don't really tell us about the inherent costs of debt so much as they tell us that debt imposes the same sorts of costs on the future that taxation imposes on the present.

Well duh.

But there's nothing costly about debt that isn't also costly about taxation. And that's Grant's contribution that brings some of this back to reality. The only reason why Bob's model imposes costs on future cohorts (not future national income, of course) is because he retires all the debt. In other words, debt has the same costs and benefits that taxation has just on a different group of people: namely, it has costs associated with distribution and incentives.

Which is Krugman's original different "kettle of fish". There's nothing uniquely costly or bad about debt.

And to bring this back to Krugman and Baker's real public service announcement: it makes no sense to think about public debt the way you think about your family's debt. Talk about the country having to tighten its belt the way grandpa did during the Depression is nonsense. It's good personal finance (what else can you do?), but bad public finance.

Ryan Murphy makes a few claims I'd disagree with (I think he is too quick to confuse a strawman Lerner with Lerner... I think Nick's original #1 adds claims to the Lerner argument that people that say that stuff never make). But Ryan is justifiably frustrated that we are attributing extreme positions of single arguments to people rather than recognizing that all of these points are fundamentally right, but differentially binding depending on the situation (and that that ultimately makes it an empirical question). I agree. I feel like Nick and Bob have taken a Lerner-Samuelson point from Krugman and Baker and imagined it is some attempt on their part to disprove... something... Buchanan I guess? Or Samuelson? Economics gets really bad when it turns partisan like that. It's a science. Usually everybody has a point and the question is what model (or mix of models) is most useful in a particular situation or to answer a particular question. I don't know if Ryan would agree with this interpretation of him, but that's what I got out of him.

Grant has this conclusion, with which I also agree: "The way I see it, this keeps returning to one unavoidable conclusion: The "bad" outcomes of Bob's model can all be traced back to the fact that the interest rate exceeds GDP growth. Everything else is paper fodder."

It's bad enough that Bob and Nick have turned a Lerner-Samuelsonian reminder to a Buchananish electorate into a much bigger claim than it ever was. That fight is interesting, if a little misleading in my view. But we really should be careful not to lose the fundamental Samuelsonian point in all this, because a lot of the public still doesn't get that.

That's why Krugman and Baker were emphasizing what they were emphasizing.

"Potential output" is a probably harmless, but really dumb phrase. When people talk about "potential output" they're not actually talking about the output potential of the economy. They're not even really talking about the sustainable output potential of the economy.

We could not let children play, only teach them things essential to production in school, and have them work part time through their childhood and into adulthood. We could cut all higher education not relevant to production and put those people to work too. And we could make paying someone for childcare mandatory and force all parents to works.

We would produce a lot more than we do now. What's more, it's not like we'd be working people all that hard. It would be a dreary life, but it wouldn't be anywhere near subsistence living in the way Malthus envisioned it.

What we mean when we say "potential output" isn't equilibrium output either, because we know there can be high unemployment equilibrium (doubt it? google "employment to population ratio" or "NGDP").

So its certainly not a term you ought to take with a literal mindset. It's also not a term that you ought to take with a Walrasian mindset.

When we talk about "potential output" we're really taking a Keynes/Nussbaum/Sen approach to things. We're talking about macro relations but we're also making a general statement about human capabilities and the good life. What we mean is that at a particular employment rate that we feel comfortable and a particular level of leisure and pleasurable consumption that we think is reasonable, the economy could consistently produce X level, and we're going to call that "potential output".

It's a hugely value-laden concept. I only think that's interesting because it's often discussed as a technologically determined magnitude. Long run aggregate supply is often treated as a question of engineering - it's aggregate demand that's supposed to be all about hopes and dreams.

But that's really not true - even in the more circumscribed Walrasian sense.

This is not a mark against it, of course. It's just important that we restrict potential output to equations describing peoples' decisions, and keep it out of production functions, budget constraints, etc.